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Monday, March 06, 2006

Rates Higher On Treasury Sell-Off

Bloomberg reports on the news behind interest rate changes. "U.S. Treasuries fell, pushing the benchmark 10-year note's yield to the highest since the day before the Federal Reserve began a series of 14 straight interest-rate increases in June 2004. Investors drove prices lower on speculation a government report this week will show job growth is fast enough to encourage the Fed to lift borrowing costs at least twice more."

"'We're going to see a new, emerging period of higher long- term interest rates that are going to start now, and I believe they're going to carry on for some time,' said John Kosar. Ten-year notes are heading for a fourth day of declines, the longest losing streak since January. The yield on the 10-year note rose 6 basis points, or 0.06 percentage point, to 4.74 percent at 3:03 p.m. in New York, the highest since June 29, 2004. The yield has climbed from 4.55 percent on Feb. 28."

"The margin by which two-year yields exceed 10-year yields shrank for the seventh consecutive day to 2 basis points. Two year yields, little changed today, rose above those on 10-year notes in December for the first time in almost five years, creating a so-called inverted yield curve. The gap reached 16 basis points on Feb. 23."

"A 10-year yield at 4.75 percent may spur mortgage companies such as Countrywide Financial Corp. to sell Treasuries and other securities they hold as a hedge against falling interest rates. Betting that Treasuries will fall pushes yields higher and may lead to more sales, said Bulent Baygun. Large speculators in interest-rate futures last week had record bets on gains in the 10-year note, which may limit their interest in buying even as prices fall."

"Among hedge-fund managers and other large speculators, long positions, or bets prices will rise, outnumbered short positions by 182,758 contracts on the Chicago Board of Trade, the biggest margin on record since 1983."

"'The U.S. economy is going quite well,' said Charles Diebel, head of European rates strategy in London at Nomura International Plc. Nomura's U.S. unit is one of 22 dealers authorized to bid at Treasury auctions. 'We could see yields move a little higher from here,' he said, advising investors to stay out of 10-year notes until after the Fed's May 10 meeting."

"The 10-year yield may climb to 4.75 percent within two months, Diebel said. The yield helps determine interest rates on home mortgages. The average rate on a 30-year fixed rate mortgage, 6.24 percent last week, according to Freddie Mac, rose to a more than two-year high of 6.37 percent in November, two weeks after the 10-year yield came within a basis point of its peak for the year."

"Yields remained higher today even as a report on pending home sales added to signs the housing market is slowing. The NAR said its index of pending home resales fell 1.1 percent in January after a 2.6 percent drop in December that was originally reported as a 3 percent decline."

"Fed officials have expressed concern about the extent to which a surge in home prices has enabled consumers to increase spending faster than their incomes are rising. A report published by then-Fed Chairman Alan Greenspan in September concluded 'that a significant amount of consumption is being driven by capital gains on some combination of both stocks and residences,' he said at the time."

"Fed policy makers have boosted their target for the overnight lending rate between banks to 4.5 percent, the highest in almost five years. Interest-rate futures indicate traders are pricing in a 100 percent chance of an increase to 4.75 percent at the central bank's March 28 meeting, up from about 90 percent a month ago. The odds of another move at the May 10 meeting are about 80 percent, up from about 40 percent a month ago."